The Wall Street Journal recently published a personal finance column entitled “America’s Retirees Are Investing More Like 30-Year-Olds” that showed a marked change in the investment preferences of older Americans.

In particular, it showed a strong trend towards a higher allocation of stocks in older investors’ portfolios over the past decade:

• Nearly half of active Vanguard 401(k) investors (similar to an Australian self-managed superfund) aged over 55 held more than 70% of their portfolios in shares, a dramatic increase from the 38% in 2011.
• Approximately 40% of Fidelity Investments investors aged 65 to 69 hold two-thirds or more of their portfolios in shares.
• In Vanguard’s taxable brokerage accounts, around 20% of investors aged 85 or over (and 75 to 84) have nearly all their money in stocks, up from 16% in 2012.

Conventional investment advice suggests that having such a high allocation to shares is risky at this life stage. If by chance the investor needs to make a withdrawal during a market crash, they’ll have to sell at heavily reduced prices–receiving less funds than they expected and experiencing the disappointment when markets inevitably rebound. Even those supporting themselves with income from a portfolio can suffer, as we saw during the pandemic when even the large and well-known companies restricted or suspended their dividends. This is part of the reason the “60/40” portfolio (consisting of 60% equities, 40% bonds) has become the go-to for financial advisors.

So what’s causing the shift towards stocks, and will it continue?

There’s no doubt that one of the biggest drivers of higher stock ownership among seniors has been the decline in interest rates, which has driven down the returns on cash and fixed income investments. In 1982, 10-year U.S. treasury bonds yielded a near-unthinkable 14.2%, while in 2021 it was unthinkable for the opposite reason, recording less than 1% at year-end.

Inflation targeting is an economic concept pioneered by the New Zealand central bank, but is now applied in the U.S., Europe, Australia and the United Kingdom, among others. While the targets differ slightly, these central banks typically target long-term inflation rates in the range of 2% to 3% (this is the target in Australia, while the U.S. targets approximately 2%).

Assuming that the central bank achieves this inflation goal, an investor purchasing a 10-year government bond returning 1% per annum is locking in a real loss of 1% to 2% per year for the next decade. And that’s assuming inflation remains at the low levels we saw for the decade after the Global Financial Crisis (GFC).

Unfortunately, the past couple of years has seen the highest rates of inflation in around 40 years, fueled by several different factors: supply chain challenges due to the pandemic, labour shortages, and the war in Ukraine, to name a few. Fixed income securities have even less appeal in such an environment, particularly if investors feel the inflation will persist (or even worsen, as those who were around for the 1970s will remember).

Baby boomers in particular have had a terrific ride on the share market for the past few decades. Not only have asset prices risen at a healthy rate, investors have been able to opportunistically put money to work at very favourable prices–especially during the Global Financial Crisis, for example. Investors with decades of success in the share market are likely to understand the investing process quite well, and to be very attracted to this method of wealth creation–something that’s unlikely to change significantly in a short space of time.

This confidence in the share market has only been enhanced by the actions of central banks during the previous economic crises–particularly the GFC and the recent coronavirus pandemic. Central banks around the world provided an unprecedented level of support, both in scale and the approaches used, including slashing benchmark interest rates (making bonds and cash even less appealing) and engaging in “unconventional monetary policy” such as quantitative easing. This has only reinforced investors’ mindsets about the long-term success of owning equities.

As Robert Shiller, the Nobel Prize-Winning economist at Yale University most known for the Shiller PE ratio, said “The spirit of the times is ‘Don’t worry about the markets crashing. They will come back up and set new highs. Index funds such as Vanguard also support this notion, publishing long-term charts showing the resilience of the stock market despite economic, political and other challenges, and providing information about strategies such as dollar-cost averaging for amateur investors.

Countless people have been successful investing in property of various kinds, including land, residential and commercial real estate. One downside of property ownership however, is the much higher costs compared with shares. There are fees to the agents when buying and selling, council rates, maintenance and repair costs, and stamp duty or land taxes–not to mention the time required to manage tenants or meet with buyers/developers (there can be a bit of paperwork too, particularly with some of the more traditional banks). Many people also are put off by the idea of taking on substantial debt, which is usually required for most real estate deals.

The costs of share ownership, on the other hand, have been declining precipitously for decades. Accounts can be opened quickly and easily, onerous fees such as monthly account and custodial fees have gone by the wayside, transaction costs reduced to single digit dollars ( even free, under certain circumstances), and trading and deposits/withdrawals can be done at the click of a button (Robin Hood is even trying to move it to 24-hours). Long gone are the days of “I have to call my broker”, with interfaces so intuitive that Robin Hood has even been accused of “gamifying” the process (a topic for another day).

With professional management, diversification, low fees, and transactions at the click of a button, there’s a lot of appeal to retirees wanting to simplify their money management. Franking credits are the icing on the cake, particularly for retirees who may have their tax affairs structured to receive a refund for the corporate tax paid by their portfolio holdings.

Today’s older investors have shunned the conventional wisdom of the 60/40 portfolio, and it’s easy to see why. By and large, they’ve had a long and successful history in the share market, buying on any weakness and holding on for the rich rewards that share ownership can bring.

As interest rates have risen, the yields on savings accounts and bonds have become more attractive. Some pundits are even suggesting that 2022 signalled what may prove to be the end of a 40-year bull market in bonds (suggesting that bond yields will continue to rise). While this might encourage some older investors to diversify their portfolios a bit more, it seems unlikely that the trend of higher share ownership will change anytime soon.

Equities are designed to provide higher long-term returns than bonds (because of the greater risk that an investor takes with each individual investment), and they provide much greater inflation protection–something retirees might have in mind thinking back to the 1970s. Additionally, the low fees and low maintenance are of great appeal to people wanting to make the most of their time after a lifetime of paperwork. Certainly, the greater transparency and regulation that has brought more integrity to the markets hasn’t hurt either.